Stevens signals rates to stay on hold, despite growth slump

Updated
September 03, 2014 20:29:00

A drop off in exports has delivered a sharp deceleration in Australia's economic growth. The country's GDP grew by half of 1 per cent in the June quarter, the slowest pace in more than a year. But despite the string of dispiriting economic news, Reserve Bank Governor Glenn Stevens has today given another indication that more interest rate cuts are unlikely.

MARK COLVIN: A drop-off in exports has delivered a sharp slowdown in Australia's economic growth.

The country's GDP (Gross domestic product) grew by half of 1 per cent in the June quarter, the slowest pace in more than a year.

Business reporter Pat McGrath.

PAT MCGRATH: Glenn Stevens was speaking in Adelaide today, a day after the RBA (Reserve Bank of Australia) board met in the South Australian capital to make its September interest rate decision.

GLENN STEVENS: And we decided to continue our policy of stability, sometimes described as masterly inaction and we've left cash-rate unchanged for just over a year now.

PAT MCGRATH: The governor says he was glad to wake up this morning to see no mention of that decision on the front pages of Australia's financial press.

GLENN STEVENS: I've succeeded in my ambition to be boring. I hope I can continue that.

PAT MCGRATH: But perhaps unfortunately for Glenn Stevens, there are many people who see his views on house prices, interest rates and employment, far from boring - and he touched on all of those issues today.

He noted some of the worrying side effects of keeping interest rates at historic lows, including the huge amount of lending and borrowing that it encourages.

GLENN STEVENS: In our efforts to stimulate growth in the real economy, we don't want to foster too much build-up of risk in the financial sector, such that people or financial institutions become overextended.

PAT MCGRATH: And so while low interest rates can deliver growth, Glenn Stevens says they've contributed the staggering rise in house prices over the past few years.

Figures released this week show home values surged by 11 per cent over the past year.

GLENN STEVENS: It perhaps is stating the obvious at present that, while we may desire to see a faster reduction in the rate of unemployment, further inflating an already elevated level of housing prices seems an unwise route to try to achieve that.

PAT MCGRATH: And just in case anybody missed the message that the official cash rate is unlikely to change any time soon...

GLENN STEVENS: As I mentioned earlier, perhaps the conduct in monetary policy could be described as boring. If so, I regard that as a success. It may be true that financial markets like to think about almost nothing else than what will happen to the cash rate next month, but I suspect most people are happy not to have to think about that.

PAT MCGRATH: ANZ senior economist Felicity Emmett sees today's comments as a sign the RBA believes it's doing all it can to put a floor under the country's economic growth.

FELICITY EMMETT: Glenn Stevens really thinks that policy, or interest rates are at a low enough level to be impacting on the economy and on those parts that respond to interest rates, like consumer spending and housing and that lowering the interest rate further probably wouldn't help to lift the parts of the economy that are weak, like mining investment.

PAT MCGRATH: And there are signs of more weakness on that front.

A slump in exports drove a big slowdown in Australia's economic growth during the three months to the end of June.

GDP edged up by half of 1 per cent during the quarter, down from 1.1 per cent in the previous quarter. So the economy is now growing at an annual rate of 3.1 per cent.

Despite the slowdown, and Australia's high unemployment rate, Felicity Emmett sees today's GDP number as a solid result.

FELICITY EMMETT: In terms of the outlook, we still have those important factors weighing on growth. So we probably won't get this sort of strength over the next few quarters, but it's a good base to be starting from.